‘Biggest mistake’ bond investors may make ahead of Fed rate cuts

Finance

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    Investors may want to stick with fixed income investments — possibly even adding to them — despite the Federal Reserve’s intention to cut interest rates this year.

    “Your biggest mistake could be rushing back into equities before you’re considering all these opportunities in fixed income,” BondBloxx co-founder and COO Joanna Gallegos told CNBC’s “ETF Edge” this week.

    Though off its peak of more than 5% in late 2023, the benchmark 10-year U.S. Treasury note yield has reaccelerated over the past month. As of Thursday’s market close, the yield was hovering near 4.31%. It touched 4.429% on Wednesday, a high for this year.

    To manage interest rate volatility effectively, Gallegos suggests investors look to exchange-traded funds focused on intermediate term bonds.

    “If you go into the intermediate space, whether it’s in credit or within Treasurys, you’re taking on some risk and you’re going to benefit from a total return tail wind when rates go down,” she said.

    Morgan Stanley Investment Management’s Tony Rochte recommends a similar medium-term strategy with vehicles like the Eaton Vance Total Return Bond ETF (EVTR) under his firm’s management.

    “It’s right now a 6-year duration, about a 6.6% yield,” the firm’s global head of ETFs said in the same interview. “It’s a best ideas portfolio.”

    Rochte also pointed to municipal bond funds, like the Eaton Vance Short Duration Municipal Income ETF (EVSM), for income-generating opportunities.

    “We also converted a municipal bond mutual fund last Monday here at the NYSE to an ETF, symbol EVSM, and that’s a municipal. Again, 3 1/2% yield, almost a 6% taxable equivalent yield. So these are very attractive rates in the current environment.”

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